New Giant Is Double-Edged Sword for Pentagon

The merger of the Boeing Co. with McDonnell Douglas Corp. is expected to have some important short-term benefits for the Pentagon, but it could pose some serious disadvantages in the buying and maintaining of weapons in the longer run.

During the next few months, Pentagon officials and private defense analysts say, the merger will help stabilize the industry as it sheds excess capacity as a result of declining defense budgets.

At the same time, however, the shrinkage in the number of major warplane manufacturers is likely to leave the Defense Department with an industry facing less competition and fewer incentives to develop bold new ideas for weaponry.

Lawrence J. Korb, a Brookings Institution military specialist, questions whether Boeing would have proposed as radical a design for a new Joint Strike Fighter had it not been facing two determined rivals for the contract--one of them McDonnell Douglas.

Some analysts worry that defense planners could also end up with fewer options on a variety of proposed weapons--in sharp contrast to the 1980s, when the defense industry was bubbling with contractors vying for almost every project.

The Pentagon’s current policy of encouraging defense contractors to merge with one another, despite traditional questions about antitrust implications, dates to early 1993, when the Clinton administration took office.

Defense Secretary William J. Perry, then the deputy secretary, advanced the idea as a way to facilitate the downsizing of the defense industry while minimizing the disruption--and the cost to the federal government.

He and current CIA Director John M. Deutch, who was then deputy defense secretary for acquisition, even began offering to let merged defense firms charge the Pentagon for the reorganization costs in their existing defense contracts.

When Lockheed and Martin Marietta joined last year to form Lockheed Martin Corp.--a major competitor of the merged Boeing and McDonnell Douglas--it was able to claim $1.8 billion in merger costs. In all, the Perry-Deutch policy has spawned 21 major mergers.

Meanwhile, at the Pentagon’s urging, the Justice Department and Federal Trade Commission have looked benignly at the mergers that have taken place. Before the new policy, Pentagon officials had routinely opposed any merger that would have threatened to reduce competition.

Brookings’ Korb, however, contends that the policy “has created a monster” by leaving the industry with a handful of mega-firms that have far more economic and political power than the old, more fragmented industry structure did.

With more than 200,000 employees each in the new Boeing and Lockheed Martin companies, “God help you if you want to cancel one of the contracts they have,” Korb said, raising the specter of congressional intervention. “Their political clout will be enormous.”

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Andrew F. Krepinevich Jr., director of the Center for Budgetary and Strategic Assessments, a defense-monitoring group, said the Pentagon traditionally “has relied on competition to keep costs down, but now you’re almost talking about having monopoly bidding.”

But Murray L. Weidenbaum, director of the Center for the Study of American Business in St. Louis, argues that those disadvantages could be offset by a reduction in defense contractors’ own overhead costs, which they will presumably pass on in their price structure.

And Robert W. Gaskin, a former Pentagon strategist, points out that the newly merged Boeing Co. is likely to reap gains from increased competitiveness against European weapon makers that he believes is likely to result from its bolstered strength as a mega-company.

The Pentagon may also face other questions over the next few months about what kinds of warplanes to buy for the 21st century.

Among those now in the running are the proposed Air Force F-22 fighter, being manufactured by Boeing, and the Navy F/A-18E/F, being built by McDonnell Douglas.

The Defense Department already has begun a full-scale review of defense policy that could have major implications for those and other projects. Officials expect to have some idea of where the procurement program is heading by the end of this year.

Meanwhile, analysts say the “consolidation” of the defense industry appears likely to continue, albeit perhaps at a less staggering pace. Some experts expect the Hughes Aircraft Co. to be sold next, possibly to the Raytheon Co. And more are likely after that.